Councils across England – including Croydon and Sutton – have between them borrowed billions of pounds of public money to finance the purchase of real estate and commercial properties, a policy which could place some at risk of financial collapse, according to a report published today by the Bureau of Investigative Journalism.

The Croydon Park Hotel, the freehold of which was bought by Croydon Council for £29.8m

Councils embarking on the practice have even been accused of “gambling with public money”.

In the case of Spelthorne, in Surrey, the council has borrowed a staggering 46 times its annual operating budget as it has splurged £1billion of public cash on buying real estate.

Councils say they have been forced to find new ways to generate income given the steep cuts in central government funding, which the National Audit Office calculates has fallen by half in real terms since 2010.

In common with other local authorities, Croydon has borrowed the money at historically low rates of interest from the Public Works Loans Board (PWLB), calculating that the income from leasing the properties in the commercial sector will pay off the interest on the loan and generate an income which can be used to pay for its services. According to announcements made by Croydon, they expect the two properties to generate net income of more than £2million per year.

There are no limits to how much councils can borrow and they do not have to prove they can afford it – the PWLB leaves this up to councillors to decide. The trouble is that, in the case of Croydon and Sutton, the decisions to borrow the cash and speculate on the commercial property sector were taken behind closed doors, with most of the borough’s elected councillors only finding out about it after the deals had been done.

The Croydon Park Hotel purchase was referred to the council’s scrutiny committee, but as one senior Katharine Street source told Inside Croydon tonight: “What’s the point, though? We’re questioning the sort of bolts used on the stable door when the horse has cantered off into the distance.”

In April, the government implemented guidelines aimed at discouraging councils from borrowing money to profit from investments. Croydon is one of more than 40 councils to have invested hundreds of millions of pounds since, despite such a warning.

Other local authorities have gone further afield in their search for “innovative” ways of raising revenue.

Sutton Council’s rent from Oxfam’s offices in Oxford is about to dry up. But business rates will still need to be paid

Sutton’s venture into the property market illustrates some of the risks involved. Oxfam has recently decided to vacate the offices, potentially leaving Sutton with no rental income but still expected to pay business rates to the local council in Oxford.

To make matters even more embarrassing for Sutton’s Liberal Democrat-run council, the Local Government Chronicle reported in November last year that: “the practice of councils purchasing property outside their boundaries has attracted particular controversy from outside the sector”.

The LGC quoted a senior national politician describing the practice as “gambling with public money”. The quote was attributed to… LibDem party leader Vince Cable.

Today’s report by the BIJ flags up growing concerns about the volume of borrowing undertaken by some councils, and the risks being taken with public money as a consequence.

The BIJ’s investigation has found that in the last two years, the number of councils investing in property has doubled.

In the past financial year alone, councils spent a total of £1.8billion on investment properties, a six-fold increase from 2013-2014.

Gareth Davies, the former Croydon journalist who led the BIJ investigation, says, “Of biggest concern is the scale of debts accrued by four of the smallest local authorities in England – including Spelthorne in Surrey, which says it is ‘heavily reliant on investment income’ to fund the services it provides.

“Spelthorne has so far borrowed £1billion despite having a net annual budget of just £22million. This equates to 46 times its spending power.”

Gareth Davies: BIJ reporter

The BIJ investigation has found that Woking, Runnymede and Eastleigh have all borrowed more than 10 times their budget.

The BIJ has published the details of the property investments made by more than 100 local authorities – including Croydon, Sutton and Bromley. Croydon’s most recent commercial purchases are not included in the BIJ data, however, having been concluded after the Bureau submitted its wide-ranging Freedom of Information request during the six-month investigation.

The BIJ says, “Today we have published the details in full, providing unprecedented insight into how councils are becoming property speculators – with additional details on the millions paid to property and finance consultants.”

Properties bought by councils include a BP business park in Sunbury purchased by Spelthorne for £392million; a Tesco Extra bought for £38.8million by East Hampshire District Council; branches of Waitrose and Travelodge acquired by Runnymede District Council for £21.7million and a B&Q store that is now owned by Dover District Council.

Other acquisitions range from farmland and gyms to a Royal Mail depot and a solar farm.

The Colonnades in Croydon, a real snip at £53m

But experts warn that commercial property investments are volatile, and the fact that councils are financing them through borrowing makes them even riskier. And then there’s the impact of Brexit.

“If you look at the most extreme examples, there are public services used by vulnerable people which are dependent on how well rental income in the property market is doing,” Don Peebles, the head of policy for the Chartered Institute of Public Finance and Accountancy (CIPFA), which oversees council finance, told the BIJ.

“This is a risk that local authorities have never been exposed to before and you have to ask whether they are equipped to handle that risk.”

In Croydon, the council finance chief, Richard Simpson, who oversaw the two multi-million-pound deals, has announced he is quitting Fisher’s Folly. Which means management of the properties and their finances in the post-Brexit uncertainty is likely to be in the hands of Jo “We’re No Stupid” Negrini, the council CEO, and Simon Hall, the accountant who is the cabinet member for finance.

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About insidecroydon

News, views and analysis about the people of Croydon, their lives and political times in the diverse and most-populated borough in London.
Based in Croydon and edited by Steven Downes. To contact us, please email inside.croydon@btinternet.com

1 Response to Councils’ property deals are ‘gambling with public money’

It is has to be stated that Central Government controls the Public Loans Work Board. It will be fully aware of the actions undertaken by Local Authorities and it can only be assumed to have tacitly agreed to this nationalisation of private assets as a speculative measure to raise funds. The question must be asked why is the British Government prepared to accept the use of funds designed originally to invest in creating public assets and the provision of services for gambling funding?

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News, views and analysis about the people of Croydon, their lives and political times in the diverse and most-populated borough in London.
Based in Croydon and edited by Steven Downes. To contact us, please email inside.croydon@btinternet.com